M/S Cybermate Infotek Ltd.,, Hyderabad vs Assessee

These are cross-appeals by Revenue and assessee against the orders of the Commissioner of Income Tax(Appeals)-II, Hyderabad dated I.T.A. Nos. 474 & 631 /Hyd/2014 :- 2 -:

03-01-2014. There are various issues on which Assessing Officer (AO) made disallowances/additions which CIT has partly allowed. Hence, cross appeals. Both assessee and Revenue have raised corresponding grounds on various issues which are dealt, with after hearing the Ld. Counsel for assessee and Ld. DR for the Revenue.

2. Briefly stated, assessee filed return of income belatedly on 30-03- 2011 for AY.2009-10. AO selected the case for scrutiny and on the reason that assessee has not substantiated many of the claims and has not furnished complete details, made various disallowances as under:

Rs.

a. Disallowance of deduction under section 10A 6,75,96,165 b. Disallowance of investments written off 4,09,46,675 c. Disallowance of overseas employees 3,32,00,000 d. Disallowance of software purchase 59,03,400 e. Disallowance of business promotion expenses 73,05,795 f. Disallowance of consultancy charges 37,51,921 g. Disallowance of Auditor's Fee 1,00,000

3. Assessee contested the issues before the CIT(A) and CIT(A) confirmed the disallowances of deduction u/s.10A, investments written- off, disallowance of software purchase and disallowance of audit fee. Assessee is contesting the same. Ld. CIT(A) gave a relief on disallowance of overseas employees, business promotion expenses and consultancy charges. Revenue is aggrieved only on the disallowance of Rs.3.3 Crores towards overseas employees. Ld CIT(A) also enhanced the income on which assessee objected not only on merits but also on not giving an opportunity before enhancing. These are considered issue-wise.

I. Claim of deduction u/s.10A of the Act:

4. Assessee had an export turnover of Rs.1.53 Crores and had arrived at the deduction u/s.10B of an amount of Rs.1,96,28,459/-. However, I.T.A. Nos. 474 & 631 /Hyd/2014 :- 3 -:

while filing the return of income, by mistake the amount pertaining to Section 10A was shown under the head capital work in progress and amount pertaining to capital work in progress of Rs.6,75,96,165/- was shown against 10A claim. Since the typographical mistake was noted during the assessment proceedings, Assessee claims that it has filed revised computation before the AO which was ignored. Be that as it may, AO noted that there cannot be any claim of deduction u/s.10A at Rs.6,75,96,165/- as against export turnover of Rs.1.53 Crores. AO also gave a finding that all the pre-requisites for claiming deduction u/s.10A has not been fulfilled and FIRCs filed in support of the export turnover is not complete. Since, assessee claim is not substantiated, the entire amount of Rs.6,75,96,165/- was disallowed and added to the total income returned.

4.1 Before the CIT(A), assessee submitted that this claim was wrongly shown in the computation whereas the actual claim was only Rs.1,96,28,459/-. In support it filed the relevant certificates of FIRCs and permission from STPI and stated to have filed form 56F in support of the claim. However, Ld. CIT(A) noticed that there is no renewal of STPI certificate nor assessee has filed the relevant form 56F which quantifies Section 10A deduction which is pre-requisite for allowing 10A deduction. However, CIT(A) acknowledged that the mistake in claim was a typographical error and therefore restricted the disallowance to the amount of Rs.1,53,00,444/-.

4.2 On considering the rival submissions and perusing the Paper Book on record, we are of the opinion that this matter requires re-examination by the AO. It is stated that assessee was claiming 10A deduction in earlier years and as per the provisions, assessee is eligible for continuation of claim for a period of ten years. Therefore, it is necessary I.T.A. Nos. 474 & 631 /Hyd/2014 :- 4 -:

that the eligibility of assessee should be examined. As seen from the assessment order, the AO seems to have been carried away by the amount of claim made against export turnover and no other conditions/details seems to have been examined. Before us, Ld. Counsel filed a copy of form 56F which is stated to have been filed before the authorities but not acknowledged. Therefore, in the interest of justice and noting that assessee's claim was made in earlier years, we are of the opinion that matter requires re-examination by the AO. AO also should examine the eligibility of the claim and the amount claimed towards deduction, keeping in view the eligible unit and its profits as per the provisions of the Act.

4.3 Incidental to the above claim is the direction of CIT(A) to enhance the income by an amount of Rs.6,75,96,165/- in the last para of the order, on the Remand Report sent by the AO. We are unable to understand the direction. First of all, the entire amount of Rs.6,75,96,165/- was disallowed by the AO, therefore question of enhancing the amount does not arise. The issue whether capital work in progress can be reduced or not was not an issue before the AO and this aspect was not examined at all. Since the AO put it to CIT(A), with reference to claim of Rs.1,96,28,459/- and capital work in progress reduced in the computation, which the Ld. CIT(A) directed to be enhanced by an amount of Rs.6,75,96,165/- , that too without giving opportunity to assessee as contended, we are of the opinion that this capital work in progress issue also requires re-examination. AO is directed to take the revised computation filed by the assessee and determine the exact amount claimed by assessee and why this claim was made and whether the claim can be allowed as per the provisions of the Act. For this purpose, this issue of claim of capital work in progress is I.T.A. Nos. 474 & 631 /Hyd/2014 :- 5 -:

also restored to the file of AO. Accordingly, Ground No. 2, 3, 8 and 9 of assessee's appeal are considered allowed for statistical purposes.

II. Investment written-off Rs.4,09,46,675/-:

5. In the P&L A/c assessee has claimed the above amount as a write- off. AO noted that investment written-off cannot be treated as an allowable deduction as it is not a revenue expenditure. Before the CIT(A), assessee submitted that this amount was originally shown as income in the Books of Accounts and is receivable from wholly owned subsidiary in USA. Since the amount was not received from the third party to the subsidiary, under the FEMA regulations permission of the RBI was obtained to convert the outstanding amount into equity. Later on in view of the RBI's circular No.69 dt. 25-07-2011, 22.5% of the amount invested was written-off during the year. Since the amount was originally offered as income, non-receipt of the same was eligible as deduction u/s.37(1). After obtaining the Remand Report from the AO and also noted down the amounts remitted and capitalization of receivables, Ld. CIT(A) concluded that the write-off does not satisfy the conditions prescribed. Before us, Ld. AR filed various annual reports in support that the amount was originally offered as income and receivable from subsidiary was converted to equity, in view of the FEMA provisions, and then by virtue of RBI circular written-off the amount. Since the amount was originally offered as income, subsequent write-off is allowable as revenue expenditure, it was contended.

5.1. Without going into the merits of the claim, we are of the opinion that this claim also requires re-examination. Assessee's claim that amounts are originally offered as income, subsequently converted to equity of the subsidiary and written-off on the basis of the circulars of I.T.A. Nos. 474 & 631 /Hyd/2014 :- 6 -:

RBI requires examination by AO, as none of the figures are comparable on the basis of the annual reports filed before us. In order to examine the issue and to give one more opportunity to assessee to substantiate the claim, matter is restored to the file of AO with a direction to examine the factual aspect of the contentions of assessee and then decide whether the amount can be allowed as revenue expenditure or not as per the provisions of Act. For this purpose, this issue is also restored to the file of AO and Ground No.4 is accordingly considered allowed for statistical purposes.

III. Software purchases:

6. Assessee is in the business of software development and stated to have purchased software to an extent of Rs.59,97,744/-. Out of which AO accepted an amount of Rs.95,160/- and disallowed the balance amount as not substantiated. Before the Ld. CIT(A), assessee furnished all the vouchers which are listed in para 8.3. However, the Ld. CIT(A) treated the expenditure as capital expenditure and directed the AO to allow depreciation as per the schedules. Before us it was the contention that software purchased are not on capital account, but on revenue account in the business of software development and since vouchers are furnished before the CIT(A), which was also remanded to AO, the amount has to be allowed as revenue expenditure.

6.1 We have examined the issue. As seen from the assessment order, the issue raised by AO is only with reference to non-furnishing of vouchers with respect of purchases claimed in the P&L A/c. There is no dispute before the AO as the software purchases are on revenue account. Only for lack of proof of software purchase, AO disallowed the amount. The said proof was furnished before the Ld. CIT(A) which was I.T.A. Nos. 474 & 631 /Hyd/2014 :- 7 -:

also sent on Remand Report to the AO. We are surprised to see that Ld. CIT(A) directing the AO to treat as capital purchase which issue not all raised by AO nor by assessee. In view of this, we modify the order of CIT(A) and direct the AO to allow the amount as revenue expenditure. Ground No. 5 & 6 are allowed.

IV. Issue of audit fee Rs.1 Lakh:

7. AO noticed that assessee paid an amount of Rs.1 Lakh on which TDS was not done. Invoking the provisions of Section 40(a)(ia) entire amount of Rs.1 Lakh was disallowed. Before the Ld. CIT(A), assessee submitted that amount of TDS paid of Rs.87,857/- on 27-08-2008 involves TDS on audit of fee of Rs.1 Lakh. Ld. CIT(A) directed the AO to verify and allow the amount. Since the CIT(A)'s direction is only with reference to direction given to the AO, we reiterate the same direction. Ground is considered allowed accordingly.

V. Salary paid to overseas employees:

8. While completing the assessment, AO noted that an amount of Rs.4.97 Crores was claimed under the head 'salaries'. Out of which an amount of Rs.3,32,00,000/- was towards salaries to overseas employees. On the reason that assessee do not have any branches in USA or UAE and further assessee failed to produce the details of the alleged salaries paid to the foreign employees, an amount of Rs.3,32,00,000/- was disallowed by the AO. Before the Ld. CIT(A), assessee made detailed submissions and furnished various details including various contracts and man power employed organization-wise. Ld. CIT(A) extracted the information in para 7.1, 7.2 and 7.3 of the order. This information was also sent to AO in the Remand Report. In view of this, CIT(A) was of the opinion that the disallowance made by I.T.A. Nos. 474 & 631 /Hyd/2014 :- 8 -:

the AO is not warranted and accordingly deleted. We have also examined the claims and sought clarification from assessee about the claim of salaries. The note submitted by assessee with reference to this is as under:

Note on Expenditure incurred towards Salaries (Rs.3.32 crores) :

"The company bids for various software services/Building of the products/Versions. Normally these billings will be done basin on the milestones specified in the tenders. Whenever the company completed the projects it will go to Revenue otherwise it will be kept in Inventory (Closing WIP i.e., unbilled amount). During the year as most of the works were not completed as per the specification we are not in a position to bill eventhough we incurred the expenditure on salaries and other things that is the reason this year increase in the inventory is around 19 Crores. The expenditure we incurred i.e., Rs.3.32 crores for the salaries of the persons outside India, the amount we incurred for the salaries is included in increase in the inventory in the Profit & Loss account".

In view of the clarification given and information furnished on record, we did not see any reason to interfere with the findings of Ld. CIT(A). Revenue's grounds on this, are therefore dismissed.

9. In the result, assessee's appeal is allowed for statistical purposes and Revenue's appeal is dismissed.

Order pronounced in open Court on 17th April, 2015

Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 17th April, 2015

TNMM I.T.A. Nos. 474 & 631 /Hyd/2014 :- 9 -:

Copy to :

1. M/s. Cybermate Infotek Ltd., C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

2. Dy. Commissioner of Income Tax, Circle-1(2), 4th Floor, Aayakar Bhavan, Hyderabad.

3. Asst. Commissioner of Income Tax, Circle-1(2), Hyderabad

4. CIT(Appeals)-II, Hyderabad

5. CIT-I, Hyderabad

6. D.R. ITAT, Hyderabad